Credit Reporting Systems Around the Globe Policy Seminar Inter-American Development Bank Washington, D.C. May 9, 2001 Margaret Miller, Senior Economist Corporate Strategy Group World Bank

Organization of today’s presentation I. The state of the art in credit reporting - results of World Bank survey II. The importance of credit registries in financial markets - empirical evidence III. Public policies to support credit reporting - emerging elements of “good practice” IV. Conclusions

Elements of a Credit Reporting System the public credit registry, if one exists private credit registries, including chambers of commerce, and banking associations the legal framework for credit reporting the legal framework for privacy, as it relates to this activity the regulatory framework for credit reporting the characteristics of other pertinent borrower data available in the economy the use of credit data in the economy, by financial intermediaries and others the cultural context for credit reporting

I. Results of World Bank survey of public and private credit registries

Survey sample by country

The credit reporting industry is in transition, with many new entrants The median age of private registries in the survey sample is 10 years. Thirty percent of the private registries were established since Of the 29 private registries from Latin America, 13 were established since Latin America led all other regions in the 1990s in the establishment of public credit registries.

Public vs. Private Credit Registries

Institutional Arrangements for Private Credit Registries

Who submits information to public and private registries?

Firm data collected by public and private registries

Distribution of data by public and private registries

Consumer Attention: Comparing Private and Public Registries

II. The importance of credit registries in financial markets - empirical evidence

Percentage of Banks which consult a credit registry for consumer loans

Percentage of Banks which consult a credit registry for small business loans

Importance of Registry information relative to other sources of creditworthiness

II. Importance of credit registries in financial markets Can Credit Registries Reduce Credit Constraints? Empirical Evidence on the Role of Credit Registries in Firm Investment Decisions Arturo Galindo Margaret Miller February 2001

Empirical Evidence of the Importance of Credit Registries for Credit Markets Jappelli & Pagano (1999) –relationship between registries characteristics (age, type of data) and credit / GNP Barron & Staten (2000) –greater availability of information reduces default rates, improves access to credit Kallberg & Udell (2000) –data from D&B has greater predictive power than firm financial statements Galindo & Miller (2001)

Median Firm (Debt/Capital) v. Bureau Index (Galindo & Miller)

Empirical Model

Regression Results for Credit Registry Variables CF/K*Index: (95%) CF/K*(Pos/Neg): (90%) CF/K*Quantity: (95%) CF/K*Access: (90%) Type of loans, type of report not significant

Estimated sensitivity of firm investment to cash flows, with and without registries (Galindo & Miller)

Dependent Variable: Private Credit/GDP Constant (-0.220) Income per capita (logs)0.59 (0.170) Average economic growth6.18* (1.750) Effective creditors rights13.45*** (4.120) Year credit registry0.41** (2.040) R Number of observations28 *** Significant at 1%. ** Significant at 5%. * Significant at 10%. Regression Results

Financial Development vs Years of Credit Registry Venezuela Uruguay El Salvador Peru Panama Mexico Haiti Guatemala Ecuador Dominican Republic Costa Rica Colombia Chile Brazil Bolivia Argentina Years of Credit Registry Private Credit/GDP Coefficient: 0.41 t-statistic: 2.04 R2: 0.57 Note: Figures adjusted by effective creditors rights, average GDP growth, and income per capita (log).

III. Public policies to support credit reporting - emerging elements of “good practice”

III. Emerging elements of “good practice” Legal and regulatory framework Legal framework should encourage information sharing among lenders –review bank secrecy laws which can constrict information flows Consideration of privacy issues important –broad privacy laws may unduly limit credit reporting Regulatory framework with enforcement –consumers have ability to bring complaints outside judicial system Competition policy aspects of credit info.

III. Emerging elements of “good practice” Data collected and maintained Open system, not closed network –ownership by a limited group of lenders, bank association, will discourage a broader database Collect both positive & negative information Maintain data for a reasonable time frame - 5 years minimum –do not delete data on non-payments when debt repaid

III. Emerging elements of “good practice” Data collected and maintained Data should be inaccessible after a certain amount of time –time limits may vary by size of loan, type of inquiry Credit reports should not include highly sensitive information such as sexual orientation, political or religious affiliation, etc. Other identifying information, such as gender, should be evaluated more carefully

III. Emerging elements of “good practice” Data distributed Integrity and transparency are paramount –special standing of any group, including owners or government, will discourage participation Open system preferable, reciprocity not necessary Access to detailed information preferable –loans described individually, not aggregates –institutions providing credit identified Restrictions to prevent “cherry-picking” Distribution reflects privacy considerations

III. Emerging elements of “good practice” Credit reporting and bank supervision Supervisors include financial institution’s use of credit information as part of inspections Require publicly (government) owned financial institutions to provide data to legitimate credit reporting firms, associations Encourage all financial institutions to participate in credit reporting

III. Emerging elements of “good practice” Public Credit Registry (PCR) Clear objectives for PCR –consult with financial institutions, private credit reporting firms Complement, not compete, with private firms Focus on larger loan sizes Provide customer service if data is distributed to financial system

III. Emerging elements of “good practice” Public Credit Registry (PCR) Rating policy carefully considered –syndicated loans should have uniform rating –small loans don’t require monthly rating for PCR –requiring all loans by a borrower to have the same rating can mask differences in loan types, quality –distribution of ratings to financial system can create perverse incentives

III. Emerging elements of “good practice” Consumer Attention Borrowers should have access to their own data Consumer-friendly procedures in place to challenge erroneous information in reasonable time frame Record who has accessed data as part of report Clearly established privacy policy

IV. Conclusions Credit registries are an increasingly important part of modern financial systems Empirical evidence supports importance of credit registries for access to credit, especially by consumers and small and micro enterprises Policy conditions, including the legal and regulatory framework, are critical in the development of robust credit reporting systems